Posted on 29 August 2013
Now the summer is coming to an end, many of us are thinking of the new school term and for some that means private education and the associated costs.
Figures from the independent schools council show that school fees rose by 4.5% last year and 4.6% the year before that. The average term fee for private school is £4596 and £3903 for day school pupils. The total cost of private education from 5 to 18 years old is now around £200,000 per child but despite this many parents are still sending their children to independent schools. And with school fees coming out of taxed income – meaning a 40% taxpayer needs to earn £20,000 to pay £12,000 of school fees – it’s not unusual to find couples with two children in private education devoting the whole of one income to paying the school fees.
So if it’s possible that your children will be privately educated it makes sense to start planning now – it’s a big financial commitment and like others, is more manageable if families plan early.
If a parent gives a child funds to invest, the tax rules say that any income received by the child can be taxed as income of the parent where the income exceeds £100 per year. But there is no such limit for gifts by more distant relatives.
This means that grandparents could give money to their grandchildren without the income (i.e. interest received, share dividends) from the gift being taxed as income of the grandparent.
Our top tips for saving for school fees are:
Check to see if there are any grants or bursaries available, these aren’t always publicised so it’s worth asking. Local charities sometimes provide funds for education, for instance for books
Use the child’s family allowance to help save. It is surprising how much relatively small amounts can grow over time. Saving the £20.30 weekly allowance for one child at 5% annual interest compounded monthly would give you a balance of £13,700 in ten years. And that’s with no increase in the level of allowance.
Use your ISA allowances if you aren’t already to save money towards fees. £11,520 per parent is available (e.g. £5760 in one cash ISA and the remaining £5760 in a stocks and shares ISA)
Venture capital trusts or Enterprise Investment schemes are extremely tax efficient but only suitable for a small group of people as they are quite high risk.
Consider equity income funds, but these are also high risk investments
Use grandparents’ £3000 annual gift exemption. This is efficient with regard to inheritance tax and includes gifts to savings accounts, trusts, child trust funds and junior ISAs.
Set up a discretionary trust for grandparents to contribute towards fees. This is relatively straightforward and the income is treated as the children’s for tax purposes. Parents can’t contribute in this way, though, without incurring tax as explained above.
If funds are tight, it’s also worth thinking about the right time to start private education. You may want to consider a state school to age 11 or even just paying for private education in the sixth form. Targeting in this way can save a lot of money and may still achieve your objectives.
We will work with you to tailor a suitable education funding strategy for you and your family.
If you’d like unbiased financial advice about school fees planning, please contact us, Smith Cooper Independent Financial Services: 01455 614500.
Smith Cooper Independent Financial Solutions Ltd is authorised and regulated by the Financial Conduct Authority (443209).
This information is based on our current understanding of taxation legislation and regulations.
Any levels and bases of, and reliefs from taxation, are subject to change. Tax treatment is subject to individual circumstances.